ii view: retail titan Tesco firing on all cylinders

First-quarter trading update to 24 May

• Total Like-for-Like (LFL) sales up 4.6% to £16.38 billion
• Food sales up 5.9%
• Non-food sales up 6.2%
• Online sales up 11.5%

Guidance:

• Continues to expect full-year adjusted operating profit of between £2.7 billion and £3 billion compared with £3.13 billion last year

Chief Executive Ken Murphy said:

"We are pleased with our performance across the first quarter. Our continued commitment to delivering great value, quality and service for our customers has contributed to like-for-like sales growth across all parts of the Group."

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ii round-up:

The retailer’s first own-branded product was tea. The name Tesco (LSE:TSCO) comes from the initials of TE Stockwell, a partner in the firm of tea suppliers, and CO from founder Jack Cohen’s surname.

Today, Tesco operates 3,829 stores across the UK, with a further 743 spread across the Republic of Ireland, the Czech Republic, Slovakia and Hungary.

In 2017, it purchased UK food wholesaling business Booker, giving it exposure to both restaurants and other food convenience stores and businesses.

Headquartered in Welwyn Garden City, Hertfordshire, it has around 18 million Tesco app users. 

For a round-up of this this latest trading update announced on 12 June, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market with a stock market value of over £26 billion. Rivals include Marks & Spencer Group (LSE:MKS), valued at around £7 billion, Sainsbury (J) (LSE:SBRY) at about £6.5 billion and Ocado Group (LSE:OCDO) at £1.8 billion. Management pushes include providing value to customers, creating a competitive advantage via its Clubcard knowledge and cutting costs to then re-invest back into the business. 

For investors, heightened costs given increased UK staff related taxes, and a tough economic outlook may now be underpinning management’s cautious full-year profit estimate. Although now growing again, sales at the Booker wholesale business remain hindered by falling tobacco sales. Competition across the retailing industry remains highly competitive, while a forecast price-to-net asset value of around 2.3 times compares to around 1.0 times at Sainsbury's, possibly suggesting better value elsewhere. 

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On the upside, a market share of 28% remains comfortably ahead of rivals, with both instore and online sales growing. A diversity of geographical locations contrasts with the UK-only focus at rivals like Sainsbury's. Tesco's net debt over the last financial year fell 2.4% to £9.45 billion, while an ongoing share buyback of £1.45 billion and a forecast dividend yield of 3.4% underline a focus on shareholder returns.

In all, and with like-for-like sales growing across all parts of the business, this major retailer continues to justify its place in investor portfolios.

Positives

• Robust UK market share
• Ongoing growth in online sales

Negatives

• Intense industry competition
• Uncertain economic outlook

The average rating of stock market analysts:

Buy